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Franchise Agreements versus License Agreements: When your License Agreement Violates the Franchise Laws

Date: 09/14/2012 | Category: Start a Franchise | No comments

This past month has‚ surprisingly (even for a franchise lawyer) been a big month where I have seen way too many proposed license agreements that were nothing other than a disguised franchise agreements.  Other than using the word “License” instead of “Franchise”‚ these agreements are every bit of a franchise agreement.  What is worse is the fact that the people drafting these agreements (hopefully not lawyers) are‚ actually‚ leaving a complete roadmap as to their intentions.  That is‚ to save money now by avoiding compliance with the franchise laws (I.e.‚ preparation and registration of FDD and Franchise Agreements)‚ these proposed “licensors” are looking to expand now‚ sell licenses and then later convert to a franchise.  

How do I know this?  Because the people drafting these license agreements actually include a written agreement provision whereby the “licensee” must later assist the “licensor” in converting the license agreement into a franchise agreement.  Here is an example of this “conversion language”:

“Licensee agrees that in the event that Licensor applies to become a Franchisor…Licensee shall assist‚ by any reasonable means‚ Licensor in becoming franchisor… and in converting Licensee’s licensed units into franchised units…”


So if you are a business owner evaluating “licensing versus franchising”‚ consider:

1.  The conversion provision in the license agreement‚ by all accounts‚ is probably unenforceable;

2.  The conversion language in the license agreement is a red flag and sign that your license is probably a franchise;

3.  The license agreement (since it violates franchise laws) will expose you to future liability and result in a situation where you will lose control over your “licensee/franchisee” and‚ possibly‚ your brand.

If‚ you currently a licensor who has gone down this road and you are now looking to convert your license agreements into a franchise‚ consider:

1.  The quicker you act‚ the better off you will be;

2.  Before taking any action‚ speak to your franchise lawyer about establishing a clear plan to convert your franchises‚ establish your FDD and compliance documents‚ and correct your prior action through disclosures to the applicable state regulatory authority.

3.  Understand that you are not the first person to face this issue‚ and if you act honestly and in a precise way‚ this “oversight” may be resolved and corrected.

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